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Price-to-Book Ratio

The price-to-book ratio, also known as P/B ratio or price-to-equity ratio, is a type of financial ratio which is primarily used to compare the organization’s net assets that are available for common stockholders, relative to the actual sales price of the stocks.

In other words, this ratio is used to evaluate a share’s market value to the shares book value. The ratio is derived by simply dividing the stock’s recent closing price by the book value per stock of the latest quarter.

Formula

P/B= Stock Price/ [Total Assets - Intangible Assets & Liabilities]

OR

P/B Ratio= Market Price per Share/Book Value per Share

Price-to-Book Ratio Analysis

The calculations from this formula are then used to analyze the stock performance of the company. If the ratio is over 1, it means the market is primarily willing to offer more than the equity/ share. However, if the ratio is below 1, it shows that the market is willing to offer a price lower than the equity/share.

A low price-to-book ratio usually means that the stock or share is either undervalued or that there is something fundamentally going wrong within the organization. The company is not performing at par.

The price-to-book ratio also gives investors an idea of whether the company is paying more for what would otherwise be left if in case the company goes bankrupt.

For firms in distress, the book-value is calculated without taking into account intangible assets as they would have zero resale value.

Advantages of Price-to-Book Ratio

Speculators find this financial ratio quite useful as it provides them a relatively intuitive and stable metric which can be used to compare the prevailing market price. Besides this, the price-to-book ratio can be utilized by companies with negative earnings but positive book values.

Underlying Factors that Can Affect the P/B Ratio Calculations

Some factors that may affect P/B ratio calculations are:

  • New stock issuance
  • Dividend payouts
  • Stock repurchases

Price To Book Ratio FAQ

What is a good price to book ratio?

Value investors have favored the price-to-book (P/B) ratio for decades and market analysts use it widely. Traditionally, below 1.0 is considered good, showing a potentially undervalued stock. However, value investors often consider stocks with a P/B value under 3.0.

How do you calculate price to book ratio?

Calculate the “Price/Book Value” Ratio (P/BV) by dividing the price of a share of stock by the book value per share. For example, a company with $100 million dollars in net assets and 10 million shares outstanding has a book value of $10 a shares ($100 million in assets / 10 million shares).

What is a good book value per share?

Value investors have favored the price-to-book (P/B) ratio for decades and market analysts use it widely. Traditionally, below 1.0 is considered good, showing a potentially undervalued stock. However, value investors often consider stocks with a P/B value under 3.0.

Why do banks use price to book ratio?

PB ratio is used to value stocks in the banking space. The ratio helps in understanding the number of times the stock is trading over and above the company's book value. It is the total value of the company's assets shareholders would theoretically get if the company were to wind up.

What is price to book value mean?

Price-to-book value (P/B) is the ratio of the market value of a company's shares (share price) over its book value of equity. The book value of equity, in turn, is the value of a company's assets on the balance sheet.

Is book value per share important?

Book value is important as a means of valuation because it represents a fair and accurate picture of a company's worth, and investors and market analysts can get a reasonable idea of the company's actual worth. Book value is primarily important for investors using a value investing strategy.

Further Reading


New evidence on size and price-to-book effects in stock returns
www.tandfonline.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

Financial statement analysis of leverage and how it informs about profitability and price-to-book ratiosFinancial statement analysis of leverage and how it informs about profitability and price-to-book ratios
link.springer.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

The link between earnings conservatism and the price‐to‐book ratioThe link between earnings conservatism and the price‐to‐book ratio
onlinelibrary.wiley.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

Explaining bank market-to-book ratios: Evidence from 2006 to 2009Explaining bank market-to-book ratios: Evidence from 2006 to 2009
www.sciencedirect.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growthThe articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth
www.jstor.org [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

Price/book value ratios and equity returns on the Tokyo Stock Exchange: Empirical evidence of an anomalous regularityPrice/book value ratios and equity returns on the Tokyo Stock Exchange: Empirical evidence of an anomalous regularity
onlinelibrary.wiley.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …

Price‐Earnings and Price‐to‐Book Anomalies: Tests of an Intrinsic Value ExplanationPrice‐Earnings and Price‐to‐Book Anomalies: Tests of an Intrinsic Value Explanation
onlinelibrary.wiley.com [PDF]
… Chan and Chen and Fama and French (1995) suggested that size and price-to-book ratio proxy for firm risk. Specifically, they argued that small firms and low price-to-book firms are particularly sensitive to adverse economic conditions and have sustained periods of low …



Q&A About Price-to-Book Ratio


Why might there be a low or high number for this type of financial metric?

A low or high number may occur because something fundamental within an organization has changed. For example, in case of bankruptcy, intangible assets such as goodwill will have zero resale value and hence will not be accounted for when calculating book value. This can lead to lower values for this metric. Another reason could be due to speculation by investors who believe that current stock prices are undervalued or overvalued relative to their intrinsic worth based on future cash flows from operations and other factors such as growth potential and risk associated with those cash flows. As a result, these speculators may bid up or sell down stocks until their expectations are met at which point speculative activity ceases resulting in normal pricing patterns once again (i.e., P/B ratios close back towards one).

What does it mean if the price to book ratio is below 1?

If the price to book ratio is below one, it means that investors are willing to offer less than what they would receive if they were to liquidate all assets and liabilities of an organization.

What does the PE ratio show?

The PE ratio shows how much an investor pays for every dollar of annual earnings; or, if earnings stayed constant it would take years to recoup the share price.

What does it mean if the price-to-book ratio is over 1?

If the price to book ratio is over 1, it means that investors are willing to pay more than what they would receive if they were to liquidate all assets and liabilities of an organization.

How can you calculate a PE ratio using market capitalization instead of net income?

You cannot calculate a PE using market capitalization because it gives you market price which is not equal to earnings per share times number of shares outstanding.

What is the price-to-book ratio?

The price-to-book ratio is the ratio of a company's share (stock) price to its book value per share.

How do you calculate the price-to-book ratio?

PB = Stock Price [Total Assets - Intangible Assets & Liabilities] OR PB Ratio= Market Price per ShareBook Value per Share

What are some examples of different types of PE ratios?

Some examples include projected and realized, and GAAP and non-GAAP.